Dollars and Sense

With the election and a surprisingly good 2012 behind us,a cautiously optimistic outlook for New Mexico's economy.

by Michael Graziano

What a year 2012 has been, for the US and New Mexico. A surprisingly good year for the stock and bond markets to date caught a lot of market participants off guard. This came mostly as a result of better than expected news on the economic front, a manageable resolution to the debt problems in Europe (at least to the point of avoiding financial catastrophe) and a Chinese economy re-accelerating off an slowdown to resume powering an integral part of the global economy. The results of this positive news were an unexpectedly strong stock and bond market so far this year, marred only slightly by a sharp drop after the election.

Among the biggest market movers of the last few years have been the debt crisis in Europe and the economic slowdown in China. While the problems in Europe certainly can't be understated, it should be understood that politicians abroad are coming to decent resolutions of their sovereign debt issues.

It should also be understood how overblown the issue has appeared in the media. The PIIGS (Portugal, Italy, Ireland, Greece and Spain) have all had their fair share of headlines stemming from the debt crisis, with Greece stealing the show. Although Greece is suffering through a depression and certainly faces dire problems and difficult decisions, it is more of an attention-grabbing headline than a true global economic problem. The fact is that although Greece's problems are severe for Greece, their economy is roughly the size of Dallas. Imagine Dallas going bankrupt. Would it cause a global economic collapse? I hardly think so. I think the bigger impact of Greece was that it acted as a litmus test for the other European countries facing debt problems, to get a more accurate idea of how austerity measures and increased taxes to dig themselves out of their deep debt hole might pan out. Europe is in for a recession next year and no doubt headlines both good and bad will move the markets every now and again, but for now disaster has been averted.

China, on the other hand, was barely whispered in the mainstream media except on the political front, where both candidates used China as an economic scapegoat. Heated rhetoric aside, China has done a fairly good job of turning an economic slowdown from a crash to a soft landing, thus allowing for an easier re-acceleration in growth. This to me is a more important economic headline than the European problems. Consider this: China's economy creates the equivalent of Greece's economy in three months, the equivalent of Spain's economy in 15 months, and the equivalent of Italy's in 24. When the world's second-largest economy sneezes, the global economy gets a cold. Fortunately, China is looking healthy.

In a year where the S&P 500 (an index of the top 500 publicly traded companies in the US, considered a good barometer for the American stock market and economy) was expected to end the year with high single-digit to low double-digit returns, the S&P actually hit a high-water mark of up almost 20% back in September. Following the old stock market adage of "sell in May and go away," a reference to the poor seasonal performance of the summer months, would have resulted in missing out on the above-average performance between the beginning of June to the most recent high made back in the second week of September.

The domestic bond market also enjoyed a good year thanks to the Federal Reserve's accommodative monetary policy of continuing quantitative easing — a fancy term for "pumping cash into the economy," designed to act as a stimulus to encourage growth. Bond buyers were rewarded with price gains thanks to decreasing interest rates. Mortgage-backed debt has done well in 2012 as housing has begun to turn around and with the announcement of QE3 (the Fed's third round of quantitative easing), which is focused on purchasing mortgages. The Fed has helped the stock and bond market perform well this year, but more than artificially pumping in growth, it should be noted the economy is healing and growing on its own.

Believe it or not, the unemployment and housing components of our economy that have been made vile buzzwords since the Great Recession have begun to turn around. The homebuilder sub-sector in the stock market is one of the top-performing industry groups in 2012. It's a bittersweet pill to swallow as the good news of new homes being built is offset by the idea that there is still an enormous amount of surplus housing, especially in areas hardest hit by the bursting of the housing bubble such as Las Vegas, Phoenix and parts of Florida and California. While the stings of lower home prices and high unemployment are still no doubt felt across New Mexico and the entire United States, the good news is that they have likely found a bottom and are improving.

Economists are projecting housing to have a positive impact on the economy this year and next, versus being the detractor it was when the housing bubble burst. Owning a home is not just an important part of the American Dream; it is a good portion of where Americans' net worth comes from. As home prices find a bottom and slowly improve, home equity will begin to increase, giving homeowners the benefits of more wealth and home equity to spend to fuel consumption if they so desire. This contributes to the "wealth effect," the increase in spending stemming from a positive psychological perception of increased wealth. As our economy is roughly two-thirds driven by consumption, this would help the economy twofold through the improvement in the housing sector and home prices, plus through increased potential spending.